Gold has been
deeply out of favor lately, languishing in its usual summer
doldrums. This sentiment wasteland is driving traders to flee
wholesale, including the futures players. Their mass exodus from
the gold market is readily apparent in futures data. But
provocatively such behavior is a powerful contrarian indicator,
heralding the birth of major new uplegs in gold. Bearish futures
traders are a bullish omen.

This truth is
easily demonstrated through the granddaddy of all futures reports,
the Commodity Futures Trading Commissionís Commitments of Traders.
The giant CoT is released every Friday afternoon, with data current
to the preceding Tuesday. It details the futures positions
currently held by several classes of traders in nearly all US
futures markets. When analyzed over time, these yield many trading
insights.

The most basic
piece of data the CoT reports is open interest, or the total
number of futures contracts currently held by traders. Each
contract is a single trade between two individual traders, one
betting the underlying price will rise (long) with the other betting
it will fall (short). Before the contract expires, it will be
settled with cash flowing from the trader who bet wrong to the
trader who bet right. This closes it.

As you can
imagine, open interest is generally correlated with the popularity
of the underlying market. When a price is rallying and generating
excitement, trading activity in that market usually swells as
traders rush to participate. But when a price is falling or
drifting, demoralized traders gradually abandon that market to seek
greener pastures elsewhere. So open interest directly reflects
prevailing sentiment.

In gold, each
futures contract represents 100 troy ounces. So with this metal
trading around $1600, each contract controls big money. If you
multiply the gold-futures open interest by 100 ounces and the gold
price, it gives you an idea of how much capital futures traders are
risking in gold at any time. Like any market, the better that gold
is doing the more capital flows in to chase these gains. And vice
versa.

This first chart
looks at the CoTís open interest for gold futures since 2001, when
goldís current secular bull was born. The gold price is
superimposed in blue. Since the CoT is only published weekly, the
gold data is sifted through the same weekly filter. Low open
interest in this metal, like we are seeing today, is very bullish.
When futures traders wax too bearish and give up on gold is exactly
when we want to buy it.

Gold open interest
has been in a strong secular uptrend since 2001, which makes sense.
The longer goldís bull persists, and the higher it drives goldís
price, the more traders are interested in participating in this
market. Nothing attracts capital like rising prices, which soon
form a virtuous circle. Traders buy gold because its price has
risen, and their buying pushes it even higher, which entices in
still more traders.

For the great
majority of goldís bull, its futures open interest has meandered
within the uptrend channel rendered on this chart. A couple times
it broke out above resistance after powerful gold uplegs sparked
exceptional excitement in the yellow metal. But as you can see,
these upside breakouts were short-lived. Gold soon corrected,
bleeding off excessive greed which led open interest to collapse
back into trend.

And a couple times
open interest broke down below support. The first was during 2008ís
once-in-a-lifetime stock panic, where even gold got sucked into that
extreme fear maelstrom. All anyone wanted was cash, even gold
wasnít good enough for most during that epic selling event. But the
sub-support journey of gold open interest was short-lived, it soon
surged back up into trend in 2009 as gold recovered.

Today gold-futures
open interest has once again fallen below its uptrendís support.
Back in late April it actually plunged to its lowest levels since
September 2009, when gold was trading near $955. While futures
traders have driven a slight uptick since, open interest is still
very low relative to recent years. And this very phenomenon has
proven wildly bullish throughout goldís entire secular bull.

I highlighted
similar gold-open-interest lows with red bars on this chart. When
open interest falls far enough to hit its secular uptrendís support,
or is dragged even lower occasionally, this psychological ebb marks
the birth of major new uplegs. When futures traders are the most
bearish or apathetic about gold, giving up on it, is exactly when
this metal is transitioning from correction or consolidation to
upleg mode.

Back in early
August 2005, gold-futures open interest collapsed to 244k
contracts. Since 2003, gold had been trapped between $400 to $450
or so. And after any long consolidation, a sideways grind with no
new upside, traders capitulate and walk away. But as you can see
above, gold soon launched a mighty rally out of those summer
doldrums. By May 2006 it was trading way up near $700 on a weekly
basis.

These
summer doldrums
are actually very important today. Global gold demand spikes are
very lumpy, driven by income-cycle and cultural factors around the
world that always arrive around the
same times
of any calendar year. The only period totally devoid of big gold
demand spikes is summer, leading this metal to grind sideways this
time of year. Gold usually drifts lower, driving widespread
capitulation.

But out of these
summer-doldrums lows likely in late July or early August, goldís big
seasonal autumn rally launches. Traders who can fight the crowd and
buy low in late summer when everyone else has given up usually win
big gains in goldís following strong season. And when other
indicators like gold-futures open interest are also bullish at this
same time frame, goldís odds for a large rally balloon.

Gold corrected
sharply after that May 2006 peak, leading open interest to collapse
as futures traders fled. On a weekly basis this metal fell back
down under $565 as open interest hit support. White it wasnít a
great time to buy seasonally, gold still recovered back up to its
recent highs after that open-interest support approach. The next
major one wasnít seen until August 2007, a great time to buy
seasonally.

Right as futures
traders were giving up on gold and moving on, it started surging to
major new bull-market highs. This metal rocketed from around $655
to $950 on a weekly basis by February 2008. Once again the brave
contrarian traders who could step in and go long gold when the
futures traders had given up on it were richly rewarded. Later that
year the crazy stock panic arrived, universally eradicating bullish
sentiment.

While gold-futures
open interestís secular support line didnít hold in such an extreme
fear superstorm, their trough still coincided closely with goldís
major bottom. By December 2008 open interest had plunged to 261k
contracts as gold was trading near $775. But gold had just begun a
huge upleg that would ultimately carry it to $1400, a new all-time
nominal high, by December 2010. Futures traders were wrong to flee.

A correction in
early 2011 drove a plunge in open interest again as futures traders
freaked out. But gold soared from around $1340 at that
open-interest ebb in February 2011 to nearly $1880 by September
2011. As you can see, when futures traders give up on gold so open
interest falls to support or below have proven fantastic times to go
long this precious metal. Buy when the futures guys refuse to.

Which brings us to
today. Gold-futures open interest was recently almost as far under
support as it was during the stock panic in late 2008! That was the
only other time in this entire secular bull when open interest bled
far enough to hit multi-year lows. And after that earlier
episode of futures abandonment, goldís greatest upleg of its entire
secular bull began marching higher. Contrarian traders like our
subscribers earned fortunes.

Will a similar
mighty upleg accelerate in the months ahead? Probably, as the data
is crystal-clear in showing that when futures traders get
discouraged in gold and pare their bets is right when major new
uplegs launch. Todayís low open interest relative to recent history
implies poor sentiment. And bearish psychology sucks in all
near-term sellers, leaving only buyers. So it is the spawning
ground of major uplegs.

The Commitments of
Traders report goes way farther than simple open interest though,
dividing traders into three distinct categories. These are
technically known as commercial traders, non-commercial traders, and
nonreportable positions. Observing over time how gold-futures
positions shift among these classes offers even more insights into
where the metal is likely heading in the near future.

The single-most
important thing to remember about futures is they are a zero-sum
game. A gold futures contract cannot be created until both a
long-side trader and short-side trader are found. Any money won by
one side of the trade is a direct cash loss by the other side.
Every long has a corresponding short counterparty. Thus the total
number of longs and shorts is always perfectly equal, they exactly
offset.

But within these
three categories of traders, net-long and net-short positions
emerge. If the commercials are mostly short, the non-commercials
are mostly long. A sizable cottage industry has grown up over
decades attempting to explain the futures interactions across these
groups, and use them to attempt to divine future price movements.
But CoT trader-category analysis certainly doesnít have to be
complex.

The commercials
are large traders who are actually producing or consuming the
underlying commodity. In gold they include miners and jewelry
manufacturers. They generally use the futures markets to hedge, to
lock in selling prices (producers) or buying prices (consumers).
The only reason they even have this option to hedge is because
speculators are willing to take the opposite side of these futures
contracts.

The non-commercial
traders are large speculators who are solely in the game for trading
profits. They neither mine gold nor use it in products. The
nonreportable positions are small speculators, who also have no need
to take delivery of gold. In pursuing their own profits, these two
groups of speculators provide a great service to the gold market.
Their liquidity is essential to keeping it functioning efficiently.

This next chart
looks at the net-long and net-short positions among all three
categories of traders. While there is some controversy about how
these boundaries are drawn (is a particular trader a hedger or
speculator?), the raw data is still useful for traders to consider.
Just like with open interest, there are particular changes in the
net-long-net-short gold-futures distribution characteristic of major
bottomings.

As you can see,
throughout this entire secular gold bull the commercial hedgers have
always been net-short. And this makes business sense. As gold
gradually hit new highs over the last decade, its producers chose to
lock in their selling prices in case those highs didnít last.
Sometimes the miners themselves wanted to hedge, and other times
banks forced them to hedge in return for project financing.

Of course in a
secular bull investors hate hedging, and expect gold to keep
powering higher on balance indefinitely. The longer a bull lasts,
the more traders extrapolate the move continuing indefinitely. So
speculators, both large and small, have eagerly taken the offsetting
long side of the hedgersí price-lock trades. They are eagerly
willing to accept the price risk the producers and consumers want to
offload.

Hedgers generally
arenít trying to time the gold market, they are locking in prices
via gold futures for business reasons that have nothing to do with
uplegs and corrections. New gold mines often take a decade or more
to come to fruition, and when they need to be hedged to win
financing has nothing to do with short-term psychology. But
speculators, on the other hand, are dominated by goldís sentiment.

Since it is these
guys collectively trying to time gold, they act as a contrarian
indicator. Like all traders, they get the most excited and
greedy after gold has already rallied and is hitting a major peak.
And they get the most discouraged and scared after gold has already
corrected and is bottoming. Prudent contrarian traders can
capitalize on this groupthink herd mentality to buy gold cheap
before major uplegs.

Generally in CoT
analysis, the small speculators are considered the best contrarian
indicator. They have less experience, capital, and sophistication
than large speculators. But as this chart shows, most of the times
that small speculators have the smallest net-long position
(therefore they are the most bearish) the large speculators concur.
I highlighted some of these bearish ebbs for the small speculators
in red.

As open interest
naturally grew throughout this secular gold bull, so did the
net-long and net-short positions among the trader groups. So there
is a support line for the large speculators and their longs and a
mirror-image one below for the hedgers and their shorts. When the
large speculators scale back their net-long bets enough to hit this
support line, it is usually right on the verge of a major gold
upleg.

You can see these
episodes above, in late 2006, mid-2007, late 2008 during the stock
panic, and again this summer. After each of these past
episodes where speculators greatly reduced their net-long positions
because they didnít think gold was going anywhere, gold soon started
rallying or even surging. Huge uplegs were born out of the last two
episodes in mid-2007 and late 2008, gold soared to new heights.

Like most traders,
futures guys give up at exactly the wrong time. They pare
their long-side bets the most after gold has either corrected
sharply or drifted sideways long enough to convince traders it is
doomed to languish indefinitely. Such episodes of despair motivate
all weak hands interested in selling anytime soon to dump their
positions, which leaves only buyers. So out of such bearishness new
uplegs are born.

And once again
this summer, the net longs of large speculators and even the net
shorts of hedgers have fallen nearly as far below their respective
support lines as they did during 2008ís stock panic. Small
speculatorsí net longs are back to 2009 levels, with a major
multi-year low recently seen. Hardly anyone is the least-bit
bullish on gold today, instead bearish and giving up on it after its
long consolidation over this past year.

The last time this
kind of sentiment was seen after the stock panic, gold was just
launching its biggest upleg of this entire secular bull! I suspect
we are on the verge of another large upleg now, as the capitulation
and despair today is the perfect breeding ground for one. When
futures traders are the least bullish on gold is when we should be
the most bullish. They always get it wrong at major bottoms.

At Zeal we are
ramping up for this coming major upleg in gold, which may already be
underway. The terrible sentiment in gold reflected among futures
traders has driven amazing bargains in
gold stocks,
silver, and
silver stocks. So we are building up our precious-metals-stock
trading positions ahead of the seasonal autumn rally. Gold is
perfectly positioned to soar dramatically this year for a variety of
reasons.

You can get
prepared, and see which high-potential stocks we are buying, in our
acclaimed weekly
and monthly
subscription newsletters. In them I draw on our vast experience,
knowledge, wisdom, and ongoing research to explain what the markets
are doing, why, where they are likely heading, and how to trade them
with specific stock trades as opportunities arise.
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The bottom line is
futures tradersí recent ebb in gold trading is a very bullish omen.
They have given up on gold because it has corrected and consolidated
for too long, with speculators dramatically reducing their net-long
positions. This has dragged down gold-futures open interest as
these traders walk away to seek opportunities elsewhere. This is a
reflection of bearishness, despair, and capitulation in gold.

But out of similar
conditions in the past, the mightiest uplegs of goldís entire
secular bull have launched. When futures traders capitulate and
abandon gold is exactly the time to buy. Like traders in general,
they are a fantastic contrarian indicator. They get greedy and
bullish at major tops and scared and bearish at major bottoms, the
exact wrong times. Todayís sorry state of gold-futures trading
means this metal is ready to surge.